Marine Gasoil

It’s been more than three years since the International Maritime Organization (IMO) fully committed to the January 1, 2020, implementation of IMO 2020, a rule that slashes the allowable sulfur content in bunker fuel used in the open seas around most of the world from 3.5% to only 0.5%. There’s been a lot of angst in the interim, most of it regarding the changes in crude slates, refinery operations and fuel blending needed to meet a flip-of-a-switch spike in global demand for low-sulfur bunker. Also, shippers worried that prices for rule-compliant fuel would go through the roof. Well, it turns out that the transition period in the months leading up to the IMO 2020 era has been largely drama-free. Supplies of very low-sulfur fuel oil (VLSFO) and marine gasoil (MGO) — the bunker most ships will now use — have been building in most places, prices are up but moderating, and while there may be a few hiccups as ships shift to new, cleaner fuels, life will go on. Heck, life will likely be even better for most complex U.S. refineries, which can churn out large volumes of low-sulfur refined products and which will have access to price-discounted high-sulfur “resid” as an intermediate feedstock. Today, we take a big-picture look at the global bunker market as IMO 2020’s implementation day approaches.

The countdown clock to January 1, 2020 — Implementation Day for the IMO 2020 rule on low-sulfur marine fuel — is ticking, and while that date may still seem far away, it is decidedly not. The impending switch from 3.5%-sulfur fuel oil to marine fuel with sulfur content no higher than 0.5% will affect a broad swath of the energy sector worldwide, not to mention consumers of diesel and other low-sulfur distillates that will be in much higher demand by this time next year as the run-up to IMO 2020 kicks into high gear. Already, complex and simple refineries alike are evaluating changes to their crude slates and planning to add equipment that will enable them to produce more high-value distillate and less “bottom-of-the-barrel” residual fuel oil, the source of high-sulfur marine fuel. U.S. midstream companies are gearing up to export more light, sweet crude from the Permian and other shale and tight-oil plays to simple refineries that will no longer be able to get by refining heavy, sour crudes. Marine-fuel suppliers are testing various blends to see which might produce IMO 2020-compliant fuel at the lowest cost. As for ship owners, they’re preparing for topsy-turvy fuel prices in late 2019 and 2020 as this wrenching change plays out. Today, we consider key market participants’ latest thinking on the likely effects of the new rule for low-sulfur marine fuel.

Shipowners and refiners are struggling with how to prepare for January 1, 2020, when all vessels involved in international trade will be required to meet significantly stricter limits on emissions of sulfur oxides (SOx), either by using fuel with a sulfur content of less than 0.5% or by “scrubbing” the exhaust of ship engines when using the much higher-sulfur bunker fuel that most ships now rely on. The International Maritime Organization’s (IMO) new sulfur rule isn’t a minor tweak. It’s a game changer that already is causing widening spreads on the futures market between 3.5%-sulfur heavy fuel oil (HFO) — the traditional global bunker fuel — and rule-compliant low-sulfur distillates. The rule also promises to be a boon to complex Gulf Coast and other refineries that can break down residual-based HFO into higher-value, lower-sulfur distillates. Today, we begin a new series on how shipowners, refiners and the markets for HFO and low-sulfur marine fuel are responding (or not) to the coming change in global bunker requirements.

Fuel oil demand has been declining for years on dry land – under attack by regulators anxious to reduce sulfur emissions. New international regulations introduced in January of this year are designed to further reduce sulfur emissions from ship engines burning marine fuel oil (“bunkers”)  at sea. The new regulations have had an immediate impact on the market for 1% sulfur fuel oil. Most affected ship owners are now using more marine gasoil in coastal zones. Today we examine how the new regulations have impacted fuel oil markets.

In January 2015 new international regulations came into force that reduced the permitted sulfur content in ships “bunker” fuel in Northern European and North American coastal regions. The change has required vessels travelling in those zones to use more expensive fuels or install scrubbers to remove sulfur. The changeover was expected to cause a sharp increase in shipping costs but as we discuss in today’s blog, so far the impact has been far less painful than expected, at least so far.